Sustainability risk review

Our risk processes enable us to take account of the potential wider implications of our business activities and products and services, for example on the environment and society. Reputational, sustainability and climate issues are thus all considered as an integral part of our risk review process. These three areas are often not mutually exclusive, and are considered essential to obtain a full client risk picture, alongside other key areas including credit and compliance risk.

We evaluate factors such as a company’s greenhouse gas footprint or its energy efficiency targets within our RRRP, while some of our policies and guidelines (see pages 23-25) require clients to have a plan in place to deal with climate change risks. For example, companies operating in sensitive industries frequently play a key economic role in the global supply of energy and commodities. They may also be major employers in economically weak regions. As such, responsible economic activity can be a significant driver for sustainable development. At the same time, we recognize that the activities of these companies can, in some cases, have a significant impact on the climate, biodiversity, water resources or local communities. We believe that working with our clients is essential to drive sustainable development. To this end, our policies and guidelines describe the environmental and social standards we expect our clients to adhere to but also describe business activities and operations that Credit Suisse will not finance.

The objective of sustainability risk reviews is to identify and prevent adverse impacts on the environment, on people or society through financial services provided for the activities of a bank’s clients or prospective clients. Environmental impacts can include air or water pollution, contribution to climate change, deforestation and degradation of ecosystems and loss of biodiversity. Impacts on people or societies can include damage to the health and safety of a client’s workers and contractors, or of communities adjacent to a client’s operations, undermining the livelihood of communities, as well as violation of the human rights of indigenous peoples. This is the outward-facing approach to sustainability risk.

Banks are also increasingly aware of the issues that may arise when financial services are provided to clients whose activities lead to adverse environmental and social impacts. Unsustainable economic activities of clients could lead to delayed approvals from the authorities or to sanctions from regulators, or such clients may face protests from local communities, lengthy legal disputes, or additional costs due to accidents or insufficient planning. For a bank, such issues could materialize in the form of credit losses, the deterioration of clients’ valuations and collateral, reputational damage, and adverse impacts on relationships with shareholders and (other) clients or prospective clients. Guidance for banks on how to integrate such risks into their established risk management systems is evolving at a fast pace. Of particular note in this context are the recommendations of the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures, TCFD (see pages 59-60), the OECD’s Guidance on Due Diligence for Responsible Corporate Lending and Securities Underwriting, and the European Banking Authority’s (EBA) Guidelines on Loan Origination and Monitoring.

Credit Suisse is actively working to adopt these recommendations and ensure our internal processes are in line with this guidance. We continue to support the development of such guidance in additional areas of sustainability risk, for example in relation to biodiversity. For example, as a rule, Credit Suisse will not finance or provide advice on activities undertaken by in-scope businesses within areas of High Conservation Value (HCV) that are subject to statutory local, national or international Protected Area designations, or areas that are undesignated but recognized by the international scientific community as having HCV areas. We also support multi-stakeholder initiatives that respect and protect biodiversity, including as a participant in the informal working group to establish a TNFD and in the project to further develop the ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure) tool for financial institutions

To assess risks to the environment, to people and to society, Credit Suisse pursues a risk-based approach. The current focus is on lending, capital markets and advisory transactions where Credit Suisse plays a significant role, as opposed to flow trading business, which is more dynamic in nature. Certain industry sectors, client operations or projects, countries of residence or operation, or financial services have been identified as carrying higher risks. Due diligence is therefore prioritized based on the scale (or gravity of an adverse impact), the scope (number of people affected or area impacted) and the irremediable character of an adverse impact. For transactions with potential sustainability risks, the internal specialist unit Sustainability Risk evaluates the nature of the transaction and our role in it as well as the identity and activities of the client (existing or new), reviews the regulatory and political context in which the client operates, and assesses the environmental and social aspects of the client’s operations. The team assesses whether the client’s activities are consistent with the relevant industry standards and whether the potential transaction is compatible with Credit Suisse’s policies and guidelines for sensitive sectors. The evaluation is based on information published or provided by the client but also includes information from specialized ESG rating agencies and topic-specific databases, or an adverse news search. The process often involves questionnaires to clients or prospective clients to gather general information about their management of environmental and social issues, or to investigate specific issues a company may be faced with or may have had to deal with in the past.

Based on the outcome of this analysis, Sustainability Risk submits its assessment to the responsible business unit and/or enters it into the Reputational Risk Review system for evaluation (see pages 18-19).